Do Plummeting Oil Prices Weaken Case for Keystone Pipeline?

Now in its seventh year, pending Keystone project will likely get another boost from Congress, but its fate remains unclear.

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The proposed Keystone pipeline expansion has sparked many protests like the one seen here last April in Washington, D.C. Part of it awaits approval nearly seven years since it was first submitted.

Photograph by Gary Cameron, Reuters/Corbis

PUBLISHED January 8, 2015

Back in September 2008, when a Canadian company first sought U.S. approval to build the Keystone XL pipeline, the United States was the world's third largest oil producer and crude oil prices hovered around $105 per barrel.

At that time, Apple was selling the iPhone 3G, Britney Spears won an MTV award, and George W. Bush was president.

Today, in Barack Obama's second term in the White House, Calgary-based TransCanada is still seeking the go-ahead for the northern leg of its controversial Canada-to-U.S. project, which would move oil to the Gulf Coast. But just as in pop culture and politics, a lot has changed in oil economics.

The U.S. is now the world's largest producer of oil, having more than doubled its production in six years, and the benchmark price has sunk below $50 per barrel.

Given those shifts, has the case for the $8 billion pipeline—bolstering North American energy security—lost its urgency?

Not at all, say industry supporters, who expect oil prices will increase later this year and remain at higher levels long-term. They say Keystone's 1,179-mile (1,897-kilometer) northern leg—from Hardisty, Alberta, through Montana and South Dakota to Steele City, Nebraska—remains necessary for delivering oil from a friendly northern neighbor to a world demanding more energy. (See an interactive map of the Keystone XL route.)

That's the concern of Keystone's environmental critics. They argue the pipeline is key to developing heavy crude from Canada's oil sands, which is more polluting than lighter U.S. oil. They say lower prices only amplify Keystone's role, because it offers a cheaper way than rail or trucks to transport Canadian crude. Without the pipeline, they say more oil sands crude might stay underground.

The debate is intensifying as the new Republican-controlled Congress aims again to pass a bill approving Keystone. The House could do so as early as Friday, for the tenth time. The Senate, which failed to pass an approval measure in November when controlled by Democrats but which gained Keystone backers when it passed into Republican hands, is slated to begin debate next week and make the pipeline its first vote of the year. (See related story: "6 Questions About What's Next for Keystone XL")

"Absolutely, it could be replaced by another pipeline," says Dinara Millington, vice president of research for the independent nonprofit Canadian Energy Research Institute, noting the other proposals. Still, she says these alternates might not get built or offer the same advantages. Keystone's northern leg would connect to its southern route—completed last January—to move oil to Texas.

"What Keystone has to offer," she says, "is unique access to the largest refining capacity in North America: the Gulf of Mexico."

Millington says oil prices, if they remain low for 12 to 18 months, could slow Canada's production next year. Yet she says pipelines are decades-long projects backed by contracts from oil producers that typically cover 10 to 20 years.

"Nobody's canceled our contracts, and we have a waiting list," TransCanada spokesperson Shawn Howard said in a November interview. He did not respond to a request for an update.

Millington expects oil prices to recover to a range, $75 to $85 per barrel, that will ensure continued growth of Canada's oil sands output—from nearly 2 million barrels per day in 2013 to 5.2 million by 2030. In the meantime, she says Canadian producers who have already made hefty capital investments will continue operations, even if they incur short-term losses.

"They don't really have a choice, because shutting down production might cost more than continuing production," Millington says.

Over the long term, Keystone is needed as a "safe and efficient" way to transport North American oil to a developing world that's increasingly hungry for energy, says Jack Gerard, president of the American Petroleum Institute. He says boosting global oil supplies benefits consumers everywhere by lowering gasoline prices, and adds that one-fourth of Keystone's 830,000-barrel capacity will be used to move North Dakota's oil to Gulf Coast refineries.

Job Creator or Oil Sands Accelerator?

Gerard says the "needlessly protracted" Keystone fight has a "chilling effect on infrastructure investment" and "deprives tens of thousands of hardworking Americans of well-paying jobs."

Critics say Keystone creates fewer permanent jobs than a local McDonald's. They point to the final supplemental environmental impact analysis by the U.S. State Department, which is legally required to review the project because it crosses a U.S. border. The January 2014 review estimates that construction of the project would create 3,900 one-year construction jobs and 38,200 indirect ones, but operation will create only about 50 jobs.

Keystone would do little to benefit the U.S. economy, because most of what it would carry would be exported either as crude oil or petroleum products, says Anthony Swift, staff attorney at the Natural Resources Defense Council, an environmental group based in New York City.

"This really is a pipeline through the U.S.—not to it," Swift says.

Obama seems to agree. "At issue in Keystone is not American oil; it is Canadian oil that is drawn out of tar sands in Canada," he said in an end-of-year press conference. "That oil currently is being shipped out through rail or trucks, and it would save Canadian oil companies and the Canadian oil industry an enormous amount of money if they could simply pipe it all the way through the United States down to the Gulf," he said.

"There is very little impact, nominal impact, on U.S. gas prices—what the average American consumer cares about," the president continued, "by having this pipeline come through."

Keystone critics say lower oil prices make it more difficult for the Obama administration to decide in Keystone's favor. Obama has said he would not approve the pipeline if it causes a significant increase in the greenhouse gas emissions that contribute to global warming.

The State Department's review said Keystone would not do so if oil prices remained high, because Canada's oil sands would be developed even without the pipeline. However, it cautioned that if oil prices fell to between $65 and $75 per barrel, Keystone would have "substantial impact on oil sands production levels" by offering a less expensive mode of transport that would make production more economically viable.

Even before oil and gasoline prices fell last year, the high cost of extracting oil sands and the lack of pipelines led major oil companies—Shell,* France's Total, and Norway's Statoil—to cancel or scale back Canadian projects. By expanding capacity, Keystone could change that calculus.